What is a 5-year ARM?
A 5-year ARM is an adjustable-rate mortgage with an interest rate that stays the same for the first five years. After five years are up, the interest rate can change periodically with the broader market.
A 5-year ARM typically begins with a lower introductory rate than a fixed-rate loan has. After the five years are over, the rate can adjust up or down every six months. The rate adjustments are based on a benchmark index, which in most cases is the secured overnight financing rate (SOFR). The benchmark rate tends to rise when the economy is strong and fall when the economy weakens.
Different lenders may refer to the 5-year ARM by different names. It’s sometimes called the 5/6 ARM, where the “5” refers to the starting fixed-rate period in years and the “6” refers to how often in months the rate is adjusted afterward. It’s sometimes called the 5y/6m or 5yr/6mo ARM. It used to be called the 5/1 ARM because it was adjusted annually before regulatory changes were made.
5-year ARM mortgage rates
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When to consider a 5-year ARM
A 5-year ARM makes sense if you expect to refinance your mortgage or sell your house before the introductory rate expires. You may be able to qualify for a larger loan because of the ARM’s low introductory rate. Note that the interest rate and monthly payment could climb substantially if the index rate rises anytime after the first five years are up.
Margin: A number of percentage points that the lender adds to the index to arrive at the interest rate that you’ll pay during a six-month period. For example, an index rate of 5.3% plus a margin of 2.75 percentage points would mean your interest rate would be 8.05%.
Rate cap: The maximum amount your loan’s interest rate can go up or down the first time it adjusts and each time thereafter.